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The UK faces an 'unappealing combination’ of a subdued economic recovery and above-target inflation, Bank of England governor Mervyn King said today, delivering a markedly downbeat assessment of the economy.

The Bank of England forecast GDP growth of around 1% next year, roughly in line with City forecasts. But ‘the road to recovery will be long and winding’, said King at the press conference after the publication of the Bank’s November Inflation Report, leaving the door open for more economic stimulus.

‘Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in Q4 as the boost from the Olympics in the summer is reversed – indeed output may shrink a little this quarter,’ he added.

Commenting after official data showed the UK economy exited its recession in the third quarter of the year, growing a surprisingly strong 1%, King said: ‘It is probably neither as good as the zigs suggest nor as bad as the zags imply.’

Inflation is likely to remain above target for the first part of the Bank's forecast, he added. Today’s report shows that inflation will not fall below the Bank’s 2% target until the third quarter of 2014.

Inflation shot to a five-month high in October as the trebling in university fees and rising food prices forced up the cost of living.

The Bank of England has pumped £375 billion of new money in to the economy in the past three years in an attempt to stimulate growth. But last week the Bank’s Monetary Policy Committee voted against extending its asset purchase programme. ‘The committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases,’ King clarified.

Quizzed about the announcement on Friday that the Bank would transfer up to £35 billion of cash from the QE scheme to the Treasury – a move that has provoked controversy – King said it was ‘a lot of fuss about nothing… I don’t think it affects very much.’

The UK’s recession finally ended in the third quarter of 2012, according to the Office for National Statistics (ONS). Since the publication of the stronger than expected 1% GDP growth figure, business surveys have painted a less upbeat picture of the economy. This morning a report from the ONS painted a mixed picture of the labour market, which has so far proved relatively strong. Unemployment fell to 2.51 million in September, taking the jobless rate down to 7.8%.

Inflation, as measured by the consumer prices index (CPI) targeted by the Bank of England, has averaged 3.2% over the past five years. But during the two decades since inflation targeting began inflation has averaged 2.1%

In a speech last month King defended the Bank's inflation targeting. He said that although it was too soon to ditch the 2% target, more leeway is needed to let the inflation rate drift away from 2% in order to take action to avert financial crises.

Stopped Zombie businesses going bust, re-allocated capital to any part of the market with yield, kept city pay artficially high, maintained the bubble in property prices (though mortgage costs are lower), helped the feckless who have large debts and reduced many people's wages in real terms.

QE in reality is a Govenment not Bank of England led initiative with the ultimate design to create inflation and reduce the size of Government debt, effectively robbing the hard working people who have built up savings.

I mostly agree but after giving it a lot of thought the main aim of QE isn't to create high inflation (this is an unwanted side effect of QE) but to fund the government deficit. If they want to sell debt with a low interest rate someone has to be there to buy the debt. This is of course the BOE. This is also the reason the amounts of money created for QE closely match the government deficit. In fact in the USA, Richard W. Fisher, president of the Federal Reserve Bank of Dallas said in a speech:

"The math of this new exercise is readily transparent: The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt."

Agree with the sense that in the long run the givernment deficit being financed by central bank liquidity injections seems a risky and incestuous proceeding. In the shorter term, economies might have done even more poorly without this support, even though, as others mentioned, the liquidity mainly gets stuck in the banking system.

Why do I not hear the 1970's classic term for where we now are in this economic cycle. We called it stag flation. But we had the liquidity of the banking system to ease the credit supply. Now we Banks unwilling to lend on all but the most AAA terms to Small / Medium sized employers. The domestic economy is shrinking, despite Gov. stats. to the alternative.

Somewhat belatedly, the reason why we are not hearing the present situation described as stagflation (not stag flation) is that we have plenty of stagnation, but, in comparison to the 1970s, only very modest inflation. This is because the economy is too weak for any inflation boost from external factors (commodity prices, currency devaluation, government actions) to feed through into wage/price determination. Thus inflation only sees the occasional upward blip that does not persist.

As discussed elsewhere, this is unlikely to change unless/until QE generates increased use of credit, as opposed to merely boosting banks' capital reserves.

All very well, but, according to Milton Freedman, the time lag should have been of the order of 18 months, and QE has now been in force for considerably longer without a sustained increase in inflation.

Inflation has been above the target for years now. The BOE constently under estimate futre inflation. I have no doubt that it will be enough to account for the devaluation in the GBP (creation of all the QE money) in a few years at most.

Inflation may have been above (occasionally well above) a 2% target, but this still bears no resemblance to the double-digit numbers that characterised the 1970s.

It is possible that something more substantial could occur in the next few years, but it would first require the economy to enjoy a substantial pick up, and the B of E then to fail to pull back QE funds on a timely basis. This latter, I would admit, might prove to be no simple task.

I think that both these previous instances involved printing vast quantities of actual banknotes, which is difficult (?impossible) to reverse. The test for QE would be whether it would prove to be reversible in the event that the balance started to tip in the direction of more economic activity and wage/price inflation. At present this does not seem to be likely in the forseeable future, although it is understandable to be sceptical as to whether reversing large quantities of QE would be feasible both from a practical and political standpoint.

While on this basis, Jonathan may ultimately prove right, I am not yet prepared to lean decisively towards the inflationary scenario, with immediate deflationary forces remaining strong.

So you think there is a big difference between printing money and creating it electronically? There really is no difference. If they printed notes and used it to buy government debt they could get the notes back by selling the government debt back to the market just the same as they could get electronic money back. We already have the potential future incoming BOE governor saying that they will not take interest on the government bonds and gilts they have bought. And there is no sign of them stopping QE by selling back the bonds or just taking the maturity without buying the next lot of bonds that are issued. So really it's just the same as printing money, I can't see them ever reversing it now the MPC are talking about not selling the bonds. So really no different in principle from either Zimbabwe or Weimer.

I've followed this thread with interest and going back to my (much earlier) post am not especially positive on the use of QE.

Whats important to remember for posters who are likening our situation to Japan or Zimbabwe is the long-term impactof QE on the UK's economy, or more importantly rate of inflation, is its a huge uncertainty we've introduced to the system.

I'll reiterate my belief that QE is a political rather than central bank tool aimed at creating inflation to reduce the real value of the national debt.

I am closing my remarks on this subject as follows. I have put the case of Japan to you and you said the Government Bonds were held by the public unlike the UK. When I explained the QE programme to you in Japan up to 2006, you ignore it and change the subject.

The policies followed by Japan have been the same as the UK and US. It is true for short periods of time Japan seemed to be recovering, only to quickly sink back into recession.

My view is we are going to see a Japan like situation in the UK, you don't.

Thank you for your kind even if sarcastic remarks. You are however wrong about Japan, they have not exited QE they are up to QE8: http://www.telegraph.co.uk/finance/economics/9554131/Japan-launches-QE8-as-20-year-slump-drags-on.html . I also give up on this conversation with you, I'd achieve more banging my head against a brick wall. Japan is very different from the UK, they are very wealthy, they also have a large manufacturing base and the national debt is mainly owned by the general population. Regarding inflation in the UK, even Mervyn King has recently said the UK looks forward to higher than target inflation for the next few years with very low growth.

In itself there is nothing right or wrong with inflation. If peoples pay goes up higher than inflation and there savings earn more interest than inflation people are happy. If their wages go up less than inflation they are getting a pay cut . My guess is that most people will generally see a fall in living standards by real inflation beating wage increases. Something that is not positive from most peoples point of view.

Have not been unhappy to have dropped out of this for a while. At risk of being attacked from both directions, it does not seem to me to be inconceivable that Geoff Downs will prove right in the short/medium term and Jonathan in the longer term. But a forecast of things first going strongly one way, and later strongly the other, is probably one of the least likely to prove correct!

Last round of QE was £50 billion in July. Current deficit is £8.6 billion per month. With additional funds needed to by back maturing bonds. I predict the BOE will announce another round of QE in December or maybe January latest.